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Ben Chu: There are alternatives to endless cuts

The era of austerity will not end after next year’s general election. Most of us probably knew that.

But how many of us know that austerity is set to get significantly worse after next year’s trip to the polls?

It’s a startling proposition given that the economy is recovering strongly — yet it has generated little scrutiny.

The squeeze on Whitehall departments has been unprecedented in recent years, as the Coalition has tried to slash its inherited budget deficit of 11% of gross domestic product.

Day-to-day government spending, which excludes things such as state pensions, welfare, new roads and interest payments on the national debt, has been contracting in real terms by around 2.3% on average each year since 2010.

Margaret Thatcher’s premiership has gone down in folk memory as a great “rolling-back of the state”.

But the consolidation of recent years has been a more severe squeeze on spending than anything she imposed in the 1980s.

Moreover, we’re only halfway through. The Government is expected to be running a budget deficit of 4.2% of GDP in 2015-16. And George Osborne now says he intends to run a budget surplus by 2018-19.

So how will that be achieved? The International Monetary Fund advised the Treasury earlier this summer that it should strike an “appropriate balance” between spending cuts and tax rises when designing the rest of the consolidation. Yet the Treasury’s baseline figures show the remaining consolidation coming entirely from state spending cuts.

What’s more, with pensions and other welfare spending projected to rise as the population ages, the resources available to government departments will need to shrink even more severely if the Chancellor is to meet his target.

The Institute for Fiscal Studies (IFS) estimates that delivering this plan would entail departmental cuts accelerating from 2.3% a year to 3.7% a year. Yet even that doesn’t do justice to the pain that would be felt by many departments after the next Parliament.

What if the National Health Service, schools, education and international aid were to remain largely immune from real-terms cuts, as they have been in this Parliament? What would that mean for justice, business, environment and the rest of Whitehall?

Giles Wilkes, a former special adviser to Vince Cable at the Department for Business, has crunched the numbers and they are jaw-dropping. Wilkes estimates that unprotected departments would have to deliver annual cuts of more than 20% in the three years following 2016-17.

Day-to-day spending by some could end up at less than half of 2010 levels in real terms by the end of the decade.

As Wilkes says, that’s simply not credible. Departments such as the Home Office, Justice and Defra could not deliver their current volume of services (everything from policing, to legal aid, to flood defences) if compelled to make cuts on that scale.

Business would have to slash the science funding budget, inflicting grave damage on our research base.

Is there no alternative? The small print in recent Treasury documents notes that the future consolidation could also be delivered through tax rises. And the IFS has pointed out that taxes tend to go up straight after elections.

There could also be cuts to welfare to ease the burden on government departments. We need to have a national conversation over whether taxes or welfare should take some of the strain of reducing the deficit.

But it’s also vital that we do not take the Chancellor’s overall fiscal consolidation plans as given. How necessary is it to run a budget surplus by 2018-19? This goes well beyond the Coalition’s “fiscal mandate”, which specifies only that the cyclically adjusted current budget must be in positive territory in five years’ time.

At the moment, this is set to happen a year early in 2017-18. If the stabilisation of the national debt is a medium-term objective, there is no reason to run a budget surplus at all. A modest deficit is consistent with the debt burden falling as a share of GDP as long as the economy is growing at a decent pace.

Some have accused Osborne of seizing on the aftermath of the financial crisis in 2010 as an excuse for an ideologically driven assault on the public realm. That’s somewhat exaggerated.

Any government would have needed to rein in spending four years ago in order to reduce the towering deficit. But the radical departmental spending cuts outlined for the next Parliament are another story entirely; they do indeed smack of ideology.

The stakes are high. We should not allow ourselves to be bounced into accepting a drastically smaller state without a proper debate and a clear understanding of the consequences.